How Does Disability Severance Pay Work?
Understand military disability severance pay, a one-time payment with specific financial implications that affect your post-service compensation.
Disability severance pay is a one-time, lump-sum payment for service members found medically unfit to continue their duties. This payment is for those whose condition warrants separation from service but does not meet the qualifications for a full medical retirement. This compensation provides financial support for a service-ending disability incurred while serving.
Eligibility for Disability Severance Pay
To receive disability severance pay, a service member must meet specific criteria determined by a Physical Evaluation Board (PEB), which assesses if a medical condition renders them unfit for continued service. The PEB’s findings are the primary determinant of eligibility for this type of compensation.
The disability rating assigned by the PEB must be less than 30%. This rating threshold distinguishes between separation with severance pay and medical retirement, which is typically reserved for those with disability ratings of 30% or higher.
Another condition is that the service member must have fewer than 20 years of military service. Individuals with 20 or more years of service are generally eligible for longevity retirement. The disability must also be considered to have been incurred or aggravated while the member was in a duty status, commonly referred to as “in the line of duty.”
Calculating the Payment Amount
The calculation of disability severance pay follows a specific formula mandated by federal law. The formula is: 2 multiplied by the member’s monthly basic pay at the time of separation, which is then multiplied by the number of years of creditable service. The “monthly basic pay” is the base salary for the member’s rank and time in service; it does not include other forms of compensation such as housing allowances (BAH) or subsistence allowances (BAS).
For the “years of creditable service” part of the formula, any period of six months or more is counted as a full year. For a standard disability separation, a minimum of three years of service is used. This minimum increases to six years if the disability was incurred in the line of duty in a combat zone or during combat-related operations. The number of years used in the formula is capped at 19. For example, a Staff Sergeant with 10 years and 7 months of service and a final monthly basic pay of $4,000 would have their severance calculated as: 2 x $4,000 x 11 years, for a total of $88,000.
Tax Treatment of Severance Pay
This payment is considered taxable income by the Internal Revenue Service (IRS). Federal income taxes are typically withheld from the payment before it is disbursed. An exception exists for disabilities that are determined to be combat-related. If the DoD finds that the service member’s unfitting disability was incurred as a direct result of armed conflict, while engaged in extra-hazardous service, or under conditions simulating war, the severance pay is considered non-taxable.
For veterans who initially received their severance pay as a taxable payment but later have their disability deemed combat-related by the Department of Veterans Affairs (VA), there is a specific recourse available. These individuals can file an amended tax return, Form 1040-X, with the IRS to claim a refund for the taxes that were originally withheld.
Interaction with VA Disability Benefits
A recoupment rule prevents a duplication of benefits for the same disability. Under this rule, the VA is required by law to withhold a veteran’s monthly disability compensation payments until the full, pre-tax amount of the disability severance pay has been repaid. For instance, if a veteran received a $50,000 severance payment and is later awarded $1,000 per month in VA disability compensation, the VA will not send the monthly payments to the veteran until the $50,000 has been fully recouped.
The primary exception to the recoupment requirement aligns with the taxability rules. If the disability severance pay was non-taxable because the underlying injury was determined to be combat-related, the VA is not required to recoup the payment.
A further nuance exists for veterans who have multiple service-connected disabilities. If a veteran received severance pay for one specific condition but is also rated by the VA for other, separate conditions, the recoupment only applies to the compensation for the disability that triggered the severance pay. The monthly compensation for any other rated disabilities will be paid out normally while the recoupment for the specific condition is underway.